DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 908,

WASHINGTON, D.C. 20005 -- 202-347-2624 -- FAX 202-347-4631

Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Thursday, March 20, 1997

SHELLEY's study compared the impact of Russian organized crime groups on the national economy to that of mafia groups in other countries and found that in Russia the problems are particularly acute.

For example, in contrast to mafia groups in other countries, Russian organized crime groups repatriate little of their profits, instead depositing their proceeds in foreign banks, or establishing off-shore banks. An estimated $50-150 billion has been exported from Russia since 1991, some 40 percent of which is attributable to organized crime, she said.

She also contends that Russian privatization efforts have resulted in a massive transfer of state property of organized crime groups, estimating that 40 percent of the total economy is currently controlled by the mafia. In some sectors, such as consumer markets, real estate, and banking, the role of organized crime groups is even greater, she said.

In a sign that Russian authorities are aware of the pervasiveness of their organized crime problem, Federal Security Service (FSB) head Nikolai KOVALYOV told reporters in Helsinki Wednesday that his agency has declared war on economic crime and corruption, reported Reuters. "We issue a warning to organized criminals that we will not allow organized crime...every employee in the security service must strive for that," he is quoted as saying.

KOVALYOV also told reporters that cooperation with the US on combating organized

Russian Federation

Politics

New Government Holds Debut Session

· Long-standing Russian Prime Minister Viktor Chernomyrdin presided over the first session of a revamped Cabinet today, telling ministers that the government needs "to break free of outdated approaches and solutions," reported Itar-Tass. The premier said he hoped that his new First Deputy, Anatoly Chubais, would make progress in solving the country's major economic woes.

"Chubais' knowledge and experience will make it possible to accomplish a colossal positive shift in the struggle against non-payment, as well as solving a number of other budgetary-financial questions, such as the payment of wages, pensions, students' grants, and other social benefits," he said. CHUBAIS is scheduled to fly to the Kemerovo region today to hold talks with angry workers in the Kuzbass coal-mining region on payment of back wages.

Economy

Ruble = 5,718/$1.00 (NY rate)

Ruble = 5,712/$1.00 (CB rate)

Ruble = 5,702|5,722/$1.00 (buy|sell rates)

Organized Crime "Devastating" the Economy

· Organized crime in Russia is discouraging foreign investment, depriving the country of its tax base, dominating the banking sector and financial markets, and exacerbating the widespread problem of corruption. Even more damaging to the Russian economy, however, is the contribution of organized crime activities to large-scale capital flight, said a report by Louise SHELLEY, published in the latest issue of the World Bank's Transition. SHELLEY is a professor at American University, Washington, DC.

Today's News Highlights

Russia

Major Tax Crackdown on Cos.

GE to Shut Down Moscow Unit

Dresser Forms Russia JV

European Republics

Baltel GSM System in Latvia

Miller Beer to Latvia

Sea-Land Expands in Ukraine

South Caucasus & Central Asia

Karabakh Head - Armenia PM

Chase to Advise the CPC

Politics-Economics-Business

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Thursday

March 20, 1997

Intercon's Daily

crime was growing and hinted that a joint initiative on crime-fighting could be worked out at the presidential summit this week.

CB to Allow Foreign Profits Out

· The Russian Central Bank will make it easier for non-residents of Russia to export their hard currency profits by the end of 1997, reported Itar-Tass today. Central Bank chairman Sergei Dubinin told reporters in the State Duma that the participation of foreign capital in trading on the short-term bond market was a "very positive factor," but noted that it was still necessary to preserve quotas on the access of foreign investors to the domestic state securities market. Currently, the quota is equivalent to 15 percent of the total value of the promissory notes issued, he said.

DUBININ also promised to take tough measures against Russian commercial banks with foreign participation that are pursuing their "selfish interests" in an effort to become monopoly banks and dictate terms and conditions to the state securities market.

"We will have to sort out such facts and the Bank of Russia will not have the state securities market destabilized, regardless of who makes attempts," he said. The stability of the state securities market and its successful functioning is "more important to us than the interests of any individual investor," he said.

Major Tax Crackdown in Progress

· Russian tax authorities have launched initial bankruptcy proceedings against 90 of the country's largest corporate tax debtors which together allegedly owe the government a total of 35 trillion rubles ($6.1 billion), reported today's Financial Times. The enterprises include the AvtoVAZ carmaker and Yuganskneftegaz oil company. Tax authorities have reportedly begun monitoring every company whose outstanding tax debts exceed three billion rubles.

This aggressive approach to delinquent enterprises could lead to a restructuring of enterprise debts, the firing of management staff, and the sale of controlling shareholdings to outside investors. The report notes, however, that many bankruptcy proceedings have been bogged down in the courts for months, exacerbating one of the Russian economy's worst problems—the growing inter-enterprise debt crisis.

Business

GE to Shut Down Moscow Subsidiary

· US General Electric has decided to close its Moscow subsidiary next month, complaining of continued problems with the Russian taxation system and appeals process, reported today's Financial Times. Despite sales totaling $600 million in Russia last year, GE will cease operations at its Russian distribution company, RAO GE International, after trying for nearly six months to resolve a tax dispute with Russian authorities.

Russian tax officials seized GE International's bank accounts in October to collect what they claimed were unpaid taxes. GE's Moscow representative Per JONSSON told FT that the authorities demanded money for three taxes (as is allowed under Russian law) that, according to the company's accounts, had already been paid. The newspaper suggested that Russian tax authorities find it easy to target foreign companies to raise tax revenues because of their transparent accounts. The GE dispute has now moved to the arbitration court, but the company has decided not to wait for the outcome.

JONSSON stressed that the inadequacies of Russia's erratic tax regime, including the absence of a structured appeals process, are a major problem for foreign companies. "The tax code is not stable and rates change all the time. It is too open to interpretation at the lowest levels," he is quoted by FT as saying.

The subsidiary was set up in 1991 as a distributor for GE's plastics and silicons used in construction. GE will now use Russian distributors, which have become more reliable, said JONSSON. Its investments in an aircraft engine manufacturing venture and the sale of medical and gas transmission equipment in Russia will continue.

Peter CHAROW, head of the Moscow office of the American Chamber of Commerce, said that tax problems for US companies operating in Russia had become worse over the last few years because Russian tax authorities have "gotten better at enforcing bad laws," said FT. He also noted, however, that some companies had successfully appealed against fines in the Russian court system. For example, US

When you need to know it as it happens

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pharmaceuticals company Johnson & Johnson has won nine of the 10 cases it has brought against the tax police, he said.

Dresser Forms Joint Venture in Russia

· US DMD Division of Dresser Industries, Inc. announced today the successful start-up of a joint venture company, GAZDMD, to assemble and sell equipment in Russia, said a company press release. DMD's partner in Russia is Gazavtomatika, a sister company of gas monopoly Gazprom.

The joint venture expects major market opportunities for ROOTS® Meters and Instrumentation throughout Russia and the former Soviet Union. The customer base will include Gazprom and other natural gas distribution companies.

Intercon's Daily

Assembly and testing facilities have been established at a factory south of Moscow, which is owned by Gazavtomatika. DMD's first large shipment of meter components for meter assembly at the Russian plant had been made from a facility in Houston, Texas. The venture expects to begin producing some meter parts this year, and eventually all parts by the end of 1999.

communications, and Western Wireless International, a subsidiary of US Walker Group.

Miller Beer to Be Sold in Latvia

· American Distributing Company, a unit of Baltic International USA Inc., has entered into a three-year agreement to distribute Miller beer in Latvia, reported Dow Jones. Miller Brewing Co. of North America is a unit of Philip Morris Cos. In a press release issued today, Baltic International said the exclusive license also gives its American Distributing Co. rights, through the end of the year, to begin distribution in Lithuania and Romania.

Baltic also said it has acquired exclusive rights to distribute Bartles & James wine coolers and has also begun distribution of Houston-based Gulf Pacific Rice products in Latvia and Lithuania. Baltic said it has opened an office and established a distribution network in Vilnius. Baltic International USA Inc. owns interests in and manages businesses related to the Baltic States.

IMF Tells Ukraine to Change Tax Code

· An International Monetary Fund (IMF) delegation in Kiev told Ukrainian Prime Minister Pavlo Lazarenko on Thursday that the Fund will only extend a $2.6-2.9 billion assistance program to Ukraine, if the parliament approves a new budget and tax policy, reported Itar-Tass. If the state budget meets the requirements of both sides, Ukraine will

European Republics

Baltel GSM System Up in Latvia

· Baltel Limited, the second national mobile operator in Latvia, has launched its GSM digital cellular service for commercial use, said a Nortel press release. Under a $23.5 million contract, Canada's Nortel supplied, installed, and commissioned the first phase of a complete 900 MHz GSM network, including a transmission network and microwave technology. Baltel's network also includes Nortel's Synchronous Digital Hierarchy (SDH) fiber ring solution.

Initial deployment will provide services to the city of Riga and the surrounding region, with expansion to Latvia's major cities and highways planned for the near future.

Baltel is majority owned by Latvian paging and wireless cable television operator Alina. Other shareholders include US Metromedia International Tele

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Thursday

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Intercon's Daily

receive $1.5 billion in the first tranche, said the delegation.

Sea-Land Expands Ukraine Cargo Service

· US SeaLand Services, Inc. will increase the frequency of its sailings to the Ukrainian Black Sea port of Ilyuchevsk next month, reported today's Journal of Commerce. Beginning in April, the service is being upgraded from fortnightly to weekly between the hub port of Gioia Tauro in southern Italy to Ukraine. Sea-Land will operate two ships of 400 20-foot container capacity on the route, each with substantial refrigerated cargo capacity.

Sea-Land also serves the Georgian Black Sea port of Poti through a service that runs every two weeks.

South Caucasus & Central Asia

Armenia Names Karabakh Head as PM

· Armenian President Levon TER-PETROSYAN today named the leader of Azerbaijan's separatist region of Nagorno-Karabakh, Robert KOCHARYAN as Armenia's new Prime Minister, reported Reuters. KOCHARYAN will replace Armen SARKISYAN, who resigned earlier this month because of poor health.

No explanation was given for the decision, which is certain to infuriate Azerbaijan and could prove a major setback to the Karabakh peace process. KOCHARYAN was one of the founders of Karabakh's separatist movement in 1988. Last year, he won an unrecognized presidential election in the region.

Japanese Export Insurance for Azerbaijan

· Japan will provide export guarantee insurance for $100 million worth of equipment for an ethylene plant being sold to Azerbaijan, reported Wednesday's Financial Times. This will be the first time that Japan has provided cover for exports to Azerbaijan.

Chase Manhattan to Advise CPC

· Chase Manhattan Corp. said on Wednesday that its affiliate Chase Manhattan Investment Bank

Ltd. has been appointed financial advisor to the Caspian Pipeline Consortium (CPC) for building and operating an oil pipeline between western Kazakhstan and Russia's Black Sea port of Novorossiisk, reported Reuters. CPC is a international consortium that includes the governments of Oman, Russia, and Kazakhstan, as well as US Chevron and Mobil, Russia's Lukoil and Rosneft, and Royal Dutch/Shell. The project is aimed at significantly increasing Russian and Kazakh oil exports.

RUX Concludes Deal on Uzbek JV

· Canada's RUX Resources Inc. announced on Monday that it recently concluded negotiations on its joint venture mining agreement with the government of Uzbekistan, said a company press release. The agreement which relates to the Kayragach gold project and the Akteps silver deposit was executed during a visit to Uzbekistan and Kazakhstan by a Canadian delegation, led by Ken Taylor, a former ambassador for the Canadian government. The projects were previously subject to a letter of intent between RUX and the Uzbek Government.

RUX is engaged in the business of exploring for, developing, and mining gold and other precious metals in Russia and other former Soviet republics, particularly Uzbekistan. RUX is currently reviewing a number of opportunities, some of which are in Kazakhstan. RUX is a majority-controlled subsidiary of William Resources Inc.

Kazakhstan to Abandon CIS Customs Union?

· Kazakh officials complained this week that illegal goods are flowing through its poorly-guarded borders with other CIS countries and the country may be considering withdrawing from the CIS customs union, reported Wednesday's OMRI. "The economic security of the state is suffering" because of "the huge amount of contraband goods brought in," said Kazakh State Customs Committee head Gani KASYMOV. "There is no point in carrying out internal economic reforms if the length and breadth of our borders are so porous."

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Ellen Shapiro, Managing Editor

Svetlana Korobov, Contributing Editor

Daily Report on Russia is published Monday-Friday (excluding holidays), by Intercon International, USA. Subscription price for Washington, D.C. Metro area: $895.00 per year. A discount is

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Daily Report on Russia is for the exclusive use of the subscriber only. Reproduction and/or distribution is not permitted without the expressed written consent of Intercon. Daily Report on Russia Ó copyright 1997, Intercon International, USA.

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